2008 | 2009 | ||||||
Price: | 11.65 | EPS | |||||
Shares Out. (in M): | 0 | P/E | |||||
Market Cap (in $M): | 571 | P/FCF | |||||
Net Debt (in $M): | 0 | EBIT | 0 | 0 | |||
TEV (in $M): | 0 | TEV/EBIT |
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CMGI Inc. is a classic hidden asset play. Sure, you may remember it from the heady internet mania days when it traded above a split-adjusted $1,600 for no reason except for the number of “eyeballs” and clicks some if its subsidiaries were getting. Bringing up the name never fails to elicit chuckles, but people soon stop laughing when they find out that the company has over $260M in cash on the balance sheet and a healthy supply chain management business with over $1.1B in sales that you can buy for less than fifty cents for every dollar in sales. Best of all, the venture capital portfolio that is carried on the balance sheet at a very conservative $35 million may have some golden nuggets that are flying under the radar screen of all but a few investors.
CMGI’s global supply chain management business, ModusLink, has 34 facilities in 12 countries that enable it to provide supply chain management solutions to technology companies such as Advanced Micro Devices, Eastman Kodak, Hewlett Packard, and Sun Microsystems. ModusLink’s services include Sourcing and Supply Chain Management, Manufacturing and Configuration, Fulfillment and Distribution, e-Business Suite, and Aftermarket Services (Reverse Logistics / Asset Disposition). In plain English, their offerings run from selecting the source and materials used for packaging, testing the equipment, and coordinating the delivery to taking the phone calls with complaints and handling returns. ModusLink is also an authorized replicator for Microsoft. This designation provides a license to replicate Microsoft software products and documentation for clients who want to bundle licensed software with their hardware products, an important service for computer manufacturers using ModusLink’s services.
The value proposition is straightforward: the aggregation of
customers’ purchases and ModusLink’s experience in supply chain allows the
company to negotiate better prices with suppliers and use supply chain assets
more efficiently, delivering cost savings and improved supply chain efficiencies
to clients who decide to outsource their supply chain. Clients can offload the
supply chain issues to ModusLink who can worry about finding packaging sources
in
CMGI made an aggressive acquisition in 2004 that grew ModusLink’s sales from $400M in 2004 to $1.06B in 2005, but it also cobbled together disparate systems and redundant functions such as finance and human resources, which were replicated across the globe at each facility. The final touches of a turnaround should come together in 2008 as a shared services model is applied to the human resource and finance functions allowing for most locations to rely on a few offices to provide these functions. During fiscal year 2007 nine sites went live on a new SAP-based ERP system and by second half of 2008 the investments of the ERP project should wind down and begin to bear. While the recent stock price slide is probably related to concerns about some legacy Hewlett Packard and Eastman Kodak contracts not being renewed, the new business that is offsetting these contracts is likely to improve gross margin improvement in 2008. The legacy, low margin contracts are expiring and being replaced with newer contracts that have much better economics (6% gross margin for legacy contracts compared to 12%+ gross margins for new contracts).
Even assuming flattish to down revenues for fiscal 2008 and a modest rebound in fiscal 2009, the logistics business by itself is selling at very compelling valuations. The estimates were calculated by me based on management’s comments since there is only one sell side analyst covering the story.
FY 2007 (A) FY
2008 (E) FY 2009 (E)
Sales $1,143 mil. $1,123 mil. $1,200 mil.
Pro Forma Operating Profit $29,413 $27,498 $75,655
GAAP Net Income $55,215 $29,173 $54,855
Operating EPS $1.30 $1.0 $1.50
Ratios
PE 8.7 10.5 8.1
Price to Sales 0.5 0.5 0.5
EV/Sales 0.2 0.23 0.16
EV/EBIT 4.50 4.74 2.70
As of July 31, 2007 CMGI, through @Ventures, held investments in 13 portfolio companies and showed the investments on its balance sheet at the lower of cost or realizable value. Here lies the hidden asset. In 2006 CMGI’s @Ventures business generated investment gains of $34.97 million yet the “Investment in affiliates” line in the balance sheet only showed a value of $20.66 million. In 2005, CMGI had net gains of $28.52 million from an investment carried on the books at a value of $22.53 million. Currently inside the $30.46 million in Investment in affiliates, I am particularly interested in three companies: Advent Solar, 212 Resources, and ObjectVideo.
Advent Solar is an
212 Resources, based in Midway,
ObjectVideo is one of the early leaders in the intelligent video space. Its
video analysis software utilizes patented algorithms to detect, classify and
track objects, and immediately generates useful output such as real-time
alerts, triggers for other applications, or stored business data whenever
user-defined rules are violated. ObjectVideo software enables automatic
detection of a wide range of events and activities, such as perimeter breaches,
loitering, unauthorized entry/exit, and theft of items. Its video is highly
regarded as highly accurate and is currently available to agencies involved
with homeland security such as U.S. Customs, the Department of Defense and
bases and labs. It is also available to dams and nuclear power plants, and for commercial
users such as building and facilities managers, casinos, retailers, and universities.
ObjectVideo should do very well in this security-obsessed environment under the
leadership of Raul Fernandez, its CEO, whose previous executive experience
includes founding Proxicom which he grew to a $200 million in revenues business
and then sold it for $450 million.
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